ORDER CONSTRUING § 553 OF THE BANKRUPTCY CODE
Before the Court are two consolidated actions arising out of a bankruptcy case that began under Chapter 11 of the Bankruptcy *494 Code (the “Code”) and was subsequently converted to a case under Chapter 7 of the Code. 1 One is an action filed by the United States of America on behalf of the Maritime Administration, Department of Transportation (“MARAD”) for interpleader and declaratory relief to resolve competing claims to monies that the United States withheld under a contract for ship repair (the “retention monies”). The other is an action filed by Donco Industries, Inc. (“Donco”) for turnover of the same retention monies. This Court withdrew reference of these actions from the bankruptcy court, and the United States, a party in both actions, now moves for partial summary judgment on an issue common to both. 2
BACKGROUND
Donco was the prime contractor under several contracts for ship repair performed on vessels owned by the United States, including the Adventurer, the Cape Gibson and the Cornhusker State. With subcontractors PacTherm, Inc. (“PacTherm”) and Fraser’s Boiler Service, Inc. (“Fraser’s”), Donco completed work under the Cape Gibson and Cornhusker State contracts and performed most of the work required under the Adventurer contract. MARAD paid DONCO for the work performed under the Cape Gibson and Cornhusker State contracts, after Donco certified to MARAD that all subcontractors had been or would be paid. MARAD also paid for a portion of the work for which Donco had submitted payment requests under the Adventurer contract.
Thereafter, on December 29, 1990, Donco filed a petition for relief under Chapter 11 of the Code. 3 On December 24, 1992, Pac-Therm filed an admiralty action against Don-co and the United States, as owner of the vessels, to collect for unpaid work performed by PacTherm on the Adventurer and Com-husker State contracts. On March 19, 1993, Fraser’s filed a similar action for work it performed on the Cornhusker State and Cape Gibson contracts. 4 To avoid double payment for the repairs — once to Donco and again to subcontractors PacTherm and Fraser’s — MARAD withheld approximately $600,000 of the monies for which Donco had submitted payment requests under the Adventurer contract. At the same time, the United States, on behalf of MARAD, filed an action for interpleader and declaratory relief to resolve competing claims to the retention monies. Similarly, Donco separately filed a complaint in bankruptcy court against the United States, PacTherm and Fraser’s seeking the turnover of the retention monies.
According to the United States, the monies withheld from Donco are subject to offset and/or recoupment as to the claims of other government agencies against the debtor company. 5 These claims include Internal Revenue Service (“IRS”) claims totalling approximately $426,000, claims of the Environmental Protection Agency (“EPA”) for approximately $210,000, and claims of the United States totalling approximately $1,800,000 for alleged violations of the False Claims Act (“FCA”), 31 U.S.C. § 3729. 6
DISCUSSION
The United States seeks a declaratory judgment that MARAD may offset its debt *495 to Donco with claims of other government agencies against Donco, such as those noted above. The question this Court is asked to resolve is whether there is mutuality between different governmental agencies permitting setoff under § 553 of the Code. 7
There is a split of authority on whether there is mutuality between different governmental agencies for purposes of setoff under § 553 of the Code.
8
See United States v. Arkison (In re Cascade Roads, Inc.),
Analysis begins with § 553 of the Code. Section 553 codifies the established “right to set off mutual prepetition debts owed to and owed by a creditor.”
In re Drexel Burnham Lambert Group Inc.,
“By its terms, section 553 permits setoff only by ‘a creditor’ of a ‘mutual debt owing by such creditor to the debtor’ against ‘a claim of such creditor against the debtor.’ ”
Shugrue,
Although the requirements that the debtor owe a debt to the creditor which arose prepetition and have a claim against the creditor which arose prepetition are of no less importance, only the requirement of mutuality is at issue on the instant motion. For purposes of setoff, mutuality contemplates that debts and credits be “in the same right and between the same parties, standing in the same capacity and same kind or quality.”
Boston and Maine Corp. v. Chicago Pac. Corp.,
To give effect to each word of § 553,
see Crandon v. United States,
Treating government agencies as separate for purposes of setoff comports with the generally distinct administrative structure of separate government agencies. As the court recognized in
Shugrue,
government agencies “each have separate budgets, staffs, and, most importantly, possess different rights, claims, privileges, powers and relationships.”
Furthermore, a contrary result would run afoul of an underlying policy of the Code to prevent preferential treatment of creditors.
See, e.g., Sampsell v. Imperial Paper & Color Corp.,
[a] creditor which can set off an independent debt to a debtor may effectively receive full repayment and is therefore in a preferred position vis-a-vis other creditors who cannot set off their claims. A narrow interpretation of mutuality ensures that set off is allowed only in situations in which the equitable considerations are strongest.
Although the
Arkison
Court declined to express an opinion on whether mutuality exists between different government agencies for purposes of setoff, the Ninth Circuit’s decision in
England v. Industrial Commission of Utah (In re Visiting Homes),
The Supreme Court’s decision in
Cherry Cotton Mills, Inc. v. United States,
First, Cherry was not a bankruptcy case and thus did not involve the same issues or rights. In Cherry, the federal government sought to setoff a tax refund due the petitioner under the Agriculture Adjustment Act against a loan the petitioner owed the Reconstruction Finance Corporation under 28 U.S.C. § 250(1). In Cherry, no other creditors were involved, merely a federally-created corporation. In this case, other unsecured creditors are involved. Second, the Cherry court itself limited its conclusions to the facts of that case or similar circumstances in nonbankruptcy cases.327 U.S. at 539^10,66 S.Ct. at 730 .
To summarize, this Court finds that mutuality does not exist between different government agencies for purposes of § 553 of the Code. Accordingly, one government agency may not set off the claims and debts of another in a bankruptcy proceeding.
IT IS SO ORDERED.
Notes
. In re Donco Industries, Inc., No. 92-49331-NS (Bankr.N.D.Cal.1992).
. Pursuant to an order dated August 24, 1994, Westamerica Bank ("Westamerica") was substituted for Donco to pursue litigation on behalf of Donco’s Chapter 7 bankruptcy estate.
. The bankruptcy case was converted to a case under Chapter 7 on September 22, 1993.
. In an order dated June 11, 1994, the Court granted the United States' motion to dismiss the subcontractors’ actions, mooting any potential offset claims by the United States relating to these claims.
. This order addresses only the United States' motion regarding setoff, not its motion regarding recoupment. To the extent the latter claim survives and the United wishes to pursue it, the United States shall rebrief the issue, as directed by the Court.
.Even if this Court were to hold that there is mutuality between different government agencies for purposes of setoff under § 553, the EPA and the FCA claims appear to be unlikely candidates for setoff on the facts of this case. The EPA claim appears subordinate by way of stipulation, if not as a matter of law, to other unsecured claims against the Donco estate. The FCA claim appears to collapse with the dismissal of the subcontractors’ claims.
. The United States would, of course, have to prove any such claims as a precondition of offset and/or recoupment.
.
Compare, e.g., In re Mohar,